The Man Who Made Too Much
portfolio.com
portfolio.com
If he was trading with real money, he was giving quite enough of a signal to the market. Plenty of people were writing about the possibility of the housing bubble popping, and about derivatives being "financial weapons of mass destruction." The people trading as if those warnings weren't important threw caution to the winds, and have no one but themselves to blame if they didn't learn from the behavior of the counterparties to their trades.
From farther down in the linked article: "By 2005, the amount of money he could make on the riskiest securities was not enough to justify the risk he was taking. Pricing, in his view, made no sense. Paulson concluded that he could do better on the short side--wagering that prices of risky securities would fall."
Give me a break. He should have gone on Faux News to be shouted down and laughed at? Who would have listened to this guy?
This line is so indicative of bad journalism (practically a tautology, that phrase) that even though I want to read the rest of the article and am interested in the topic, I think I'll pass.
Its not like anyone would have listened to him if he played the whistle blower roll. The recent Madoff debacle is proof of that.
The banks had created value, but not as much as everyone had thought and he took advantage of that. It's part of our system and that's fine and all, but it certainly isn't something I'm going to be all, "that's the way to do it!" He didn't do anything wrong. He played by the rules from what I know.
However, he really took advantage of something in a way that raises moral questions. Remember the valentine's episode of Futurama? Bender is selling roses and when he knows that Fry is over a barrel he hikes the price incredibly saying that demand just skyrocketed. Yeah, it's how our system works and I don't really disagree with your sentiment, but it still leaves me feeling a little gross about him as a person. Capitalism allows you to act without regard for morality so long as it's within the law and that's fair game. Doesn't mean we need to like the people who do act that way.
The reasons behind his actions can make him a saint or an asshole, but the fact that people like him exist just reveal properties of an imperfect system. And he won't be the last.
But once the market does calm down again, there will be a new Paulson. Perhaps the day this is ever fully prevented is the day that humans become permanently immune to all possible diseases.
Paulson simply sped up the reaction. At the cost of the happiness of others, maybe, but it was still a market inefficiency. There could have been 1000 mini-Paulsons, each making 1000x less, but the net effect, as far as the market is concerned, is the same. It's just very indirect and detached from noble intent (but who knows).
Alas, they're all of the same mold.
You cannot consider happiness as part of the equation. People were happy enough to sell financial instruments to Paulson at a profit. Now they are sad because they lost money in that transaction... Why all the complain? Everyone should just learn a lesson in investment from this situation.
But I agree with you.
But I've always thought that short sellers have at least one function beneficial to society.
They are the ones either whispering or yelling the king is naked.
The sooner and the louder they yell, the more contained the damage is from the nekkidness!
???
He created $15 billion of value for his shareholders.
>The banks had created value
The banks have destroyed their shareholders' and depositors' money by investing in junk and failing to prepare for a downturn.
Your 'moral' arguments are upside down.
It was a wealth transfer, no net creation.
He allocated resources correctly. That's what putting money in the stock market is fundamentally about. If you allocate resources correctly, you win. Allocate them incorrectly and you lose.
He made $15 billion by pushing down prices of assets that were overvalued (that's what short selling does.) i.e. He made the crisis slightly less terrible by driving down prices of junk securities (only slightly because 15 billion is a drop in the bucket compared to the size of the market as a whole.)
Then one day an intrepid young entrepreneur decides "hey, this whole refrigerator building thing is kind of silly. It's kind of a waste of resources. I think I'll start betting against refrigerator companies." Then he takes a whole bunch of money (that's not currently tied up in building refrigerators of course) and short sells the stocks of companies that make refrigerators. This causes their stock price to go down a bit (or rather, to go up more slowly) which drives money out of refrigerator building and into other things, like making televisions or something.
A year or two pass and suddenly everyone has an epiphany. All these refrigerators everyone has been building and stacking neatly in the corner aren't actually worth $2000 apiece. In fact, since there's so damn many of them, they're only worth like $3.50! the economy crashes! all the refrigerator companies go out of business! all the investors in refrigerator companies lose their shirts! people are committing suicide left and right because their refrigerator stockpiles are suddenly worth nothing!
But our intrepid entrepreneur is doing quite well. You see, all that money he drove into making televisions was safe because the value of televisions was not inflated. TV's were actually worth $1000 apiece, and there was no oversupply of TVs so their price stayed at $1000.
So what was the value of the entrepreneur's work? well, he kept a whole bunch of energy from being expended on building stockpiles of refrigerators. He didn't himself go out and build televisions or anything. No, his labor was more abstract and more intellectual, but still quite valuable.
Resource allocation is everything.
Imagine that GOOG has a few projects in the pipeline. A few bad ones, and a few brilliant ones.
When GOOG share price is at 700, GOOG can issue 100 shares and raise 70000. Plenty of money to throw at good and bad projects.
If GOOG share price was at 200 they would raise less than 1/3 of the money, and be very picky at what projects to fund. Only the best project would get funded.
Think about how much resources are wasted in the society though misallocation of capital due to inflated asset prices. You may look at short sellers in a completely new light.
The notion that GOOG is knowingly chasing bad projects solely because their stock price is high seems absurd. I think it's more likely that they just don't, and can't, know ahead of times what's going to stick.
It is valuable because I would pay a fee to him in order for him to manage my money. Indeed you do not need to have created something to be of value.
The financial markets are a place to trade value, it can be viewed as a game, with given rules, rules which are accepted by ALL market participants who are exposed to RISK whether they know it or not. He played the game better, whether out of luck or skill he won. Just like sports stars they play by the rules and are valuable without the need to create, because its just that entertaining to see peak human performance.
E.g. Dell creates no new technology in their products, but they did a whole lot of value-creating innovation in their supply chain.
Remember the valentine's episode of Futurama? Bender is selling roses and when he knows that Fry is over a barrel he hikes the price incredibly saying that demand just skyrocketed.
I haven't seen the episode but from your summary it sounds like Bender is doing what economists call "rent-seeking", profiting from his monopoly power (if Bender didn't enjoy any monopoly power then Fry could have just bought roses from someone else). I don't see where Paulson was rent-seeking; he was buying and selling in a market where there were lots of other people going after the same securities.
¹...and of course with our fractional-reserve currency system, in a sense, the vast majority of money is borrowed money.
He didn't 'take advantage' of anything. He did his homework and reached an accurate and objective conclusion about the state of the financial system. He then provided this information to the markets by betting on what his research predicted.
The real people who were taking advantage of the situation were the counterparties on his trades who were recklessly speculating on an unsustainable bubble (with other people's money).
He was so successful doing this because at that point there were so few other dissenting voices to compete against. I don't know how you can say that it provides no value to be right when everybody else is wrong.
It's easy to be "noble" when you don't have the chance to be "evil". Don't get me wrong, but I find it very, VERY hard to believe that if you were on Paulson's shoes and had the chance to make some $3.7 billion, you would still be so moralistic.
Paulson made money within the law (though "unethical" his trade may have been). Seems to me that people who bash him are just jealous.
Paulson can now invest some money in new businesses and create some value. He took money from the idiot banks and those who invest in them. I won't shed a tear.
It's soooo amusing to see the big banks who professed "free markets" and "deregulation" now advocating that short-selling is evil. It's the "heads I win, tails you lose" kind of thing. "Free markets" are only good just as long as they're winning...
One reason for this is that Paulson was able to recognize and act on the unimaginable—that the banks, which took on most of the subprime risk, had no clue what they were holding or how much it was worth.
More Paulsons and maybe the banks might have 'imagined' this possibility. How is it possible to be morally outraged with the irresponsible banks and Paulson.
* The greedy banks were giving out loans to people they knew couldn't afford them.
* The greedy people were taking loans on homes they couldn't afford.
* (Now) Paulson was greedy to profit on the system collapsing.
Of course everybody was acting greedy! That is the idea behind capitalism. Complaining about greed in a system based on greed is unproductive and whiny.
Though short-sellers are hated, they are necessary. For every trader who goes short, there's a trader who goes long. No one is forcing them to enter this trade. They do so because they want to. Banning short-selling would be a disaster because prices would stop reflecting reality.
Paulson may have made money in an "unethical" way, but he played by the rules. I didn't hear any investment banks complaining about short-selling when they were making money. They were dumb. They lost. They won't be missed.
Please. There were thousands of people, and hundreds of very prominent bloggers shouting as loud as they could that this was going to happen, and no one listened. No one wanted to listen. So, now, instead of blaming the people that caused the problem, they demonize the sensical people, who should have been listened to all the time.
Seriously, how big of an explosion do we need before we start listening to the people that predict the explosions accurately. This world is starting to get surreal.....in the past (maybe a year or two ago), one could pass this off as ignorance, but what we are seeing lately just can't be ignorance. Is this writer for portfolio.com really this uninformed? Has the entire financial commentary industry been poisoned by deliberate hiring of clueless people? They seem to only read each other and watch CNBC rather than reading bloggers who have had this all figured out with very high levels of accuraqcy for literally years.
You're not parking money, you're buying a house, the same way you don't worry about the resale value of your TV, you won't worry about the resale value of your home. If you manage to sell the TV at a gain, wonderful, if not, no worries.